I am trying to use the high/low method for determining variable rate per unit and fixed cost per month. This topic confuses me somewhat. Can anyone give me a good starting point/formula for this? Thanks

to mfargen: i think the method you used is scattered graph and not highlow method. your answer did not really answer the question.

so to start with there are 3 methods in splitting the mixed cost into variable and fixed the first (easiest) is the high low method second is the scattered graph (accurate but difficult to do) which usually used graphs and the third one is the least squares which used formulas.

these are the step by step procedures in high low method. i just make some sample problem to better illustrate
month-----------------COST---------------LABOR HOUR
jan--------------------$4,400-------------------1,200----
feb--------------------$4,700-------------------1,350----
mar-------------------$4,200-------------------1,100----
apr--------------------$3,800---------------------900----
may-------------------$4,000-------------------1,000----
jun--------------------$4,800-------------------1,400----

1. the first step is to determine the highest and lowest representative in this case it is the month of june(highest) whish has 4,800 cost and 1,400 labor hours, and april (lowest) 3,800 cost and 900 labor hours. (look in their cost in determing the highest and lowest.

2. then get the difference of the two representative which look like these.( 4800 - 3,800 = 1,000) and (1,400 - 900 = 500)

3. then divide the difference in cost from the difference in labor hours. so 1,000 / 500 = $2.00 per direct labor hours which represent the variable cost per unit.

4. multiply the variable rate per unit to the highest and lowest labor hour representative.
1,400 x $2.00 = 2,800
900 x $2.00 = 1,800 (this represent the total variable cost)

the total cost/the mixed cost need to split into variable and fixed, since we now know the variable all we have to do is look for the fixed cost.

since TOTAL COST = variable + fixed
therefore TOTAL COST - variable = fixed

5. TOTAL COST Of 4,800 - 2,800(variable) = 2,000 (highest representative)
TOTAL COST of 3,800 - 1,800(variable) = 2,000 (lowest representative)

you will notice that the fixed cost in the highest and lowest representative are just the same, it is so because fixed cost is constant regardless of production.

if the cost per month is extremely high or extremely low compared to normal the normal operations which is due to the companies peak or slack season or maybe the company temporarily closed down etc. the extremely high or low representative should not be chosen as the representative. like for example the highest cost is the month of june which has 4,800 cost, if for the month of july the cost was 7,000 you should not choose it as the highest representative since it has abnormal operations and might misrepresent your analysis. since the high low method is merely estimating or getting the average for the series of months.

Thankx it real helping.